Tuesday, July 29, 2008

Nobel winner slams for-profit microfinance


July 28, 2008: 03:45 AM EST

Microfinance summit debates perils of profiting from poor; Nobel laureate against it

NEW YORK (Associated Press) - When Nobel Peace Prize winner Muhammad Yunus began making $27 loans to women in Bangladesh three decades ago, he never dreamed of initial public offerings, return on equity and securitization.
Those terms weigh heavily on his mind today, as the once-charitable field of microfinance has become increasingly commercialized.
"Poor people should not be considered an opportunity to make yourself rich," Yunus said by phone from Bali, Indonesia, where he is attending a microcredit conference, which opened Monday.
The debate likely to rage this week at the Microcredit Summit Campaign conference, a gathering of some 3,600 microfinance institutions and heads of state, including Indonesian President Susilo Bambang Yudhoyono, pits privatization advocates against those who believe you can either save the world or make a buck, but not at the same time.
The pro-market faction argues that civic-mindedness alone will never draw enough capital to serve the estimated billion people who want but don't have rudimentary banking services. They also say that to be sustainable, institutions must be profitable.
Those against commercialization, like Yunus, fear the movement, born of a desire to rescue the poor from loan sharks, is losing its soul, prioritizing investors over the world's farmers, sheepherders, and 'telephone ladies,' many of whom struggle by on less than a dollar a day.
Either way, microfinance is booming. According to Deutsche Bank, the volume of microfinance loans hit $25 billion in 2007, up from $4 billion in 2001, with another $250 billion still needed. The bank expects that private investors, drawn by the sector's social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015 -- ten times more than they did in 2006.
Many groups that started as non-profits have become for-profit enterprises, and a plethora of microfinance investment funds, targeted at institutions and individuals, have opened in the last few years.
Citibank, Credit Suisse, Deutsche Bank, Morgan Stanley, and India's ICICI have all entered the microfinance market, either providing direct funding, backing investment funds, or securitizing debt. Private equity investors, including Sequoia, Blackstone Group, Carlyle Group, and Dubai's Legatum, have also piled in, according to the World Bank's CGAP, a microfinance research group.
"It's a big business," Eric Savage, Managing Director of Unitus Capital, a new for-profit firm that will help microfinance groups raise capital, said by phone from Bangalore, India. "You are seeing more and more financially-driven investors going into this market."
As that happens, greater transparency is "critically important," he said. It's the only way to attract capital, and most micro-lenders don't publish standardized annual percentage rates, which can confuse borrowers, he said.
Savage, a former investment banker, said the sub-prime crisis may give microfinance a further boost as investors seek diversification. "The microfinance sector has been relatively isolated from the global credit crisis," he said.
Tightening credit, as banks impose stricter lending rules, has so far had a "quite muted" effect on loans to microfinance institutions, he added.
At least two microfinance institutions are publicly traded: Mexico's Banco Compartamos, S.A., and Kenya's rapidly-expanding Equity Bank Ltd., which on Thursday reported 197 percent profit growth for the first half of the year.
More are making their way to market.
The Compartamos IPO, in April 2007, was a watershed event. The bank raised $474.7 million -- and the hackles of the field's civic-minded pioneers, who say the bank is making indecent profits by charging too much interest.
On Friday, Compartamos reported that net income for the first half was up 13.9 percent, to 500 million Mexican pesos ($49.5 million), over the same period last year. Return on equity fell 11.3 percent, to 39.2 percent.
Compartamos founders Carlos Danel and Carlos Labarthe, argue that microfinance is, first, finance. In an 11-page "Letter to Our Peers," published this year, they argued that high interest rates are needed to cover the cost of administering small loans in difficult markets.
They defended their above-average profits as necessary to attract investors to the still-nascent field, and said they support increased transparency. Competition, they wrote, is already helping the poor: In the past 7 years, Compartamos' interest rates have dropped from 115 percent to 79 percent.
And clients keep coming.
Many, however, remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls the "distortion" of the field he forged.
The pioneering bank he founded, Grameen, is owned by the poor borrowers it serves, and sustains itself with local deposits. The bank, which hasn't used donor money since 1998, reported a narrow profit of Taka 106.91 million ($1.56 million) on revenues of Taka 10.64 billion ($155.05 million) in 2007.
Such charity, Yunus said, "shouldn't tickle people's greed."

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